Posts filed under ‘Compliance’

Yesterday NCUA released an updated examiner’s guide on including, among other things, new guidance on member business loans and commercial lending regulations scheduled to take effect in January unless they are blocked by the courts.

I hate when people tell me what to read on my free time, but today I am going to be one of those people. If you do MBL/Commercial Loans or are considering them in the future, you should put some time aside to go over this material. Besides, the Giants game doesn’t start till 4:30 p.m., the Jets aren’t worth watching, and the Patriots don’t have a chance of winning anything beyond the AFC East now that their beloved “Gronk “ is out for the season.

Let’s take a trip down memory lane to March of this year: NCUA signed off on a radical redesign of MBL/commercial lending regulations. Specifically, it shifted from a regulatory framework heavy on specific requirements and potential waivers, and replaced it with a more general principles based approach to regulations. For example, whereas regulations currently require credit union MBL programs to be overseen by a person with at least two years of commercial lending experience, the new regulations require them to hire qualified lending personnel.

But this new approach should not be misconstrued as the equivalent of mom and dad leaving the keys to the car, telling the kids not to get into any trouble, and going away for the weekend. Regulations are replaced with requirements for detailed policies and procedures. In the preamble to the final rule, NCUA explains that it remains committed to “vigorous and prudential supervision of credit union commercial lending activities” and that “responsible risk management and due diligence remain crucial to safe and sound commercial lending. “

While I am very supportive of this new approach in concept, in practice, just as less specific regulations give credit unions greater flexibility, they also give examiners greater flexibility to manage aspects of programs with which they disagree or are uncomfortable. That is why the examination guide is so important; it provides the first glimpse of what the new examination parameters are going to be.

The guide also provides a helpful primer between the distinction of member business loans- which are counted against the aggregate MBL cap-and commercial loans, which are not.

Finally, remember that the final regulation also contains important mandate relief. Credit unions with less than $250 million in assets that fall below certain thresholds are not subject to more extensive board management and oversight responsibilities, or the requirement to develop extensive commercial lending policies.

Sorry for the late blog, but I just found out that the Governor signed our mortgage consummation bill(Chapter 491l. Effective immediately, the measure clarifies that, for purposes of RESPA and TILA, consummation occurs when a mortgage applicant signs both the mortgage and promissory note. This is most commonly done at closing.

This chapter provides welcomed certainty because the CFPB requires closing disclosures to be received by a member at least three days before consummation with certain exceptions. Case law suggested that consummation occurred when a financial institutional provides a member with a signed mortgage commitment.

As expected the Governor indicated that the Legislature will be amending the bill to clarify that it applies to electronic signatures

On Halloween, the Supreme Court decided that it would not hear an appeal challenging the constitutionality of a Connecticut law which takes direct aim at the MERSCORP model. If you provide mortgages, there is a good chance that you benefit from the efficiencies brought about by the MERS system

Connecticut has a typical mortgage recording framework. Lenders pay the clerk in the locality in which the real property is located for the right to record the mortgage and secure their lien. Traditionally, if that mortgage was sold, a new record would have to be made and additional fees paid.

Starting in the 1990s, MERSCORP changed that model. When a MERS member makes a mortgage loan MERS is recorded as the mortgage holder. When a MERS mortgage or its servicing rights are sold to another MERS member the transfer is electronically recorded in a MERSCORP data base but MERS remains the mortgage holder.

This clever system is perfect for facilitating quick and efficient secondary market sales. The GSEs are among its users. We now have a de facto national banking system. While this creates risks by making it possible for an investor in New York to buy bundled mortgages from Nevada that go delinquent, the secondary market is here to stay. The more efficiently it operates, the more cheaply you can provide mortgages to our members.

But on the local level recording fees remain a major source of income and by facilitating multiple mortgage transfers that don’t have to be recorded localities miss out on potential revenue. Connecticut addressed this problem by passing a law charging a company operating an electronic database almost three times as much for recording a mortgage as a traditional mortgagee. When the Connecticut Supreme Court upheld this statute (MERSCORP HOLDINGS, ET AL. V. MALLOY, DANNEL P)

MERS appealed to the Supreme Court which decided not to take the case.

One state won’t kill MERS but other states now have roadmap for taxing MERS transactions. As the Supreme Court recognized a long time ago the power to tax really is the power to destroy.

This morning’s American Banker is reporting on a “novel” solution that banks are employing to deal with the compliance burden. It’s reporting that five community banks in Kansas are sharing the cost of hiring a compliance person. This is a great idea, but it’s not new. It’s one that the credit union industry has already been using for at least a decade. Your credit union may already be able to participate.

In New York, we have two compliance people who work with a group of credit unions to provide compliance services. One specialist is in Central New York; one is in the Western part of the State. We are currently interviewing for a third person who will work with credit unions in the Westchester-Rockland region. We got the idea from talking to our counterparts in Georgia and Texas, and I’m sure there are other states that have jumped on the bandwagon.

In New York, the Association facilitates discussions with a group of credit unions that are willing to share the cost of a compliance specialist. If there is enough interest, the Association hires a person in that region. Our compliance department is responsible for training the specialists and is always there as a backup to help with difficult questions and projects. The program provides a cost effective way for smaller credit unions to not just complain about the compliance burden but actually do something about it. It also provides larger credit unions the opportunity to use a compliance person to take on specific tasks.

Regular readers of this blog know that its purpose is not to plug credit union services. But I feel so strongly about this model that if your Association doesn’t offer to facilitate shared compliance services, you should ask it to look into it. It’s a win-win.

Big Day at the NCUA Today

Compliance specialists should be sure they have enough coffee because today could be a long one. The NCUA has scheduled a busy board meeting that will provide plenty of required reading. Most importantly, if all goes according to plan, the Board will finalize amendments to field-of-membership requirements for FCUs and have a board briefing on supplemental capital. Later today, NCUA will also be holding a budget hearing. I will try to find the best highlights for tomorrow’s blog. I bet you can’t wait.

Does the accounting firm retained to do your audit owe your credit union a fiduciary obligation? That was the question pondered by the Supreme Court of North Carolina. In a decision released in late September that state’s highest court said the answer is No. (CommScope Credit Union v. Butler & Burke, LLP, No. 5PA15, 2016 WL 5335250 (N.C. Sept. 23, 2016)

CommScope Credit Union sued Butler & Burke, LLP, the certified public accounting firm that the CU hired to conduct annual independent audits of its financial statements for its failure to find that the credit union’s manager had not filed an IRS Form 990 from 2001-09. The oversight resulted in IRS penalties of $374,000 and the credit union wanted the firm to pay. One of the arguments it made was that, in failing to inform the credit union about the missing forms the firm breached its fiduciary duty to the credit union. Hold on, said the accounting firm, auditors typically don’t owe a fiduciary obligation to the businesses they audit and credit unions are no exception.

(Although this argument involved an interpretation of North Carolina law the credit union’s argument resonated across the country as can be seen by the fact that the US Chamber of Commerce and the National Association of State Boards of Accountancy filed briefs).

What’s the big deal? As the court explained “All fiduciary relationships are characterized by “a heightened level of trust and the duty of the fiduciary to act in the best interests of the other party” The higher the duty the firm owed to the credit union the more responsible it becomes for the 990 mishap.

The credit union won at the appellate level and the firm appealed to North Carolina’s highest court. It successfully argued that audits are conducted in part for the benefit of the public to insure investors that they can trust the financial disclosures being made by businesses. This obligation to the public as well as the credit union means that an auditor doesn’t have the obligation of undivided loyalty that typifies fiduciary relationships.

The credit union could have created a fiduciary relationship with the auditor as part of its engagement agreement but did not do so. By agreeing to perform the audit consistent with accepted audit standards the firm “agreed to find internal control deficiencies only to the extent necessary to perform its audits. Because defendant did not agree to affirmatively search for deficiencies outside of the performance of its audits, it did not agree to do anything beyond what an independent auditor normally does.”

The case isn’t over yet. The credit union can still argue that the firm’s failure to spot the missing 990’s amounted to negligence. But no matter what the ultimate outcome the accounting industry notched an important victory.

Before your supervisory committee sends out its next engagement letter it might be worth it to review what you expect to get out of your audit and the language that you have been relying on to get you there. If you thought your auditor was a fiduciary responsible for noticing that basic forms haven’t been filed think again. Put your expectations in writing. At the very least, you will start a discussion with your auditor about precisely what you are getting when you pay for its services.

On Tuesday the CFPB announced an enforcement order against Navy Federal Credit Union for engaging in unfair and Deceptive collection practices against delinquent members whose accounts were delinquent. One of the violations cited by the Bureau raises questions about one of the most fundamental precepts of credit union law: The right to restrict services to members who have caused a loss.

According to the Bureau, Navy engaged in Unfair and Deceptive Practices by denying electronic account access and services for about 700,000 accounts after members became delinquent on a Navy Federal Credit Union credit product. As explained in the press release “ This meant delinquency on a loan could shut down a consumer’s debit card, ATM, and online access to the consumer’s checking account. The only account actions consumers could take online would be to make payments on delinquent or overdrawn accounts.”

To be clear, this practice was just one of a group of hardball collection practices some of which, if true, violated the Fair Debt Collections Practices Act. But the CFPB’s finding on Navy’s account practices is hard to square with one of the bedrock rules of credit union land. As the NCUA has explained in opinion letters over the years . “Long standing legal interpretation is that an FCU may limit services to a member who has caused a loss” so long as the member retains the right to vote at the annual meeting and maintain a share draft account.

Against this backdrop, If a member has caused Navy a loss then how is it unfair and deceptive to limit his use of electronic account services? Before yesterday I would have told you that electronic services are a privilege of membership, not a right.

If this is no longer the case then NCUA should put credit unions on notice of this fundamental policy shift. If the law hasn’t changed then NCUA should consult with the Bureau and explain how Navy’s actions are distinguishable from what other credit unions do and why. We need guidance…quickly.

Yesterday it released final regulations extending basic account protections and to prepaid cards. The regulations take effect next October. The rule generally applies to general use reloadable prepaid cards. It is intended to provide card users with protections against loss and unauthorized use similar to those provided to credit card users.

Conceptually, Director Cordray has a point on this one. For an increasing number of Americans prepaid cards are their bank accounts. Right now these are the most unregulated consumer financial product in the country. It makes sense to ensure that they have the some of the basic rights and protections afforded to traditional account holders. As always. however, we wont know the regulation’s full impact until stakeholders have time to go over the 1,600 pages accompanying the final rule.

Incidentally in crafting the rule the CFPB spent a lot of time analyzing and discussing overdraft protections. For those of us who are convinced that it is only a matter of time before the Bureau enacts generally applicable regulations in this area you may want to look at an interesting discussion of overdrafts that begins on page 59 of the link I gave you. The Bureau points out that “Although Congress did not exempt overdraft services or similar programs offered in connection with deposit accounts when it enacted TILA, the Board in issuing Regulation Z in 1969 carved financial institutions’ overdraft programs (also then commonly known as “bounce protection programs”) out of the new regulation.” In other words the Bureau is well within its rights to impose further overdraft restrictions simply by amending Regulation Z.

Whether it should do this is of course another issue.

NCUA Issues Letter Detailing MLA Examinations

The NCUA released a letter to credit unions informing them that examiners will be expecting credit unions to make “reasonable and good faith efforts” to comply with the Military Lending Act now that the regulations have taken effect. This is the regulatory equivalent of giving an “A for effort “so long as a credit union is familiar with the regulation, is making an effort to implement it and has appropriate policies and procedures in place.

Remember your gumption might get you off the hook with NCUA but it doesn’t relieve you of your ongoing obligations to military personnel and their dependents.